Brian Fallow: Curbs may help big-deposit holders

People with high equity may get lower mortgage rates than otherwise as banks compete more fiercely, say economists.

Westpac estimates 1650 more people a year will be able to access its Welcome Home Loans mortgage guarantee scheme. Photo / Dean Purcell

As curbs on lending to home buyers with low deposits draw closer, one question that arises is how banks will do the rationing. Westpac's economists believe it will be by price - that is, by higher interest rates than are offered to borrowers with more equity.

Conversely, those with high equity may find they enjoy lower mortgage rates than otherwise because banks will compete more fiercely for those customers they are allowed to lend to, they say.

Those first-home buyers shut out of the market will have to rent.

So the impact of restrictions on high loan-to-value ratio (LVR) lending will be house prices lower than they would be otherwise - because some buyers have been excluded from the market - and higher rents.

"We expect that LVR restrictions would reduce first-home buyer demand, but investors would soon step into the market and support prices," said Westpac economist Michael Gordon.

"So while we would anticipate a short period of 'sticker shock' in the market, we expect that house prices would ultimately continue their upward march despite the restrictions."

The policy changes the Government announced last weekend will make little difference.

Westpac estimates 1650 more people a year will be able to access its Welcome Home Loans mortgage guarantee scheme.

These are exempt from the curbs the Reserve Bank plans for low-equity lending. The exemption makes sense because the curbs are primarily intended to reduce risks to the banking system and the economy in the event of a steep drop in house prices. If loans are government-guaranteed the risk they pose is to taxpayers, not the banks.

But 1650 buyers would have marginal influence on the housing market. They would represent just one week of sales at the pace recorded last month.

The other leg of Sunday's announcements was to make it a bit easier for people to access their KiwiSaver savings to put towards a deposit.

If that increases the number of buyers in the market, when the supply side remains the same, then it will push up prices, but the numbers involved are so small that it is more likely to be ineffectual than perverse.

The housing-related data flow of late has been a curate's egg, good in parts. It is good, for instance, that the 5300 building consents for new dwellings in Auckland over the year to June 2013 was 26 per cent higher than the previous year's 4200.

But in the year to June 2012 the statisticians estimate Auckland's population grew by 21,700 so new dwelling issuance represented one new home for every 5.2 people added to Auckland's population - barely half what was required.

In the year since then, population growth will have increased as net migration flows turned positive.

And between 2006 and 2012 about seven people were added to Auckland's population for every new dwelling, resulting in a backlog of shortage it will take years to address.

What construction there is remains weighted towards the higher end of the market. The average value of dwelling consents issued in Auckland over the year to June 2013 was $314,000. That is just the building work. The median price of an Auckland section last month, the Real Estate Institute informs us, was $310,000.

ASB's quarterly survey of housing market sentiment found a net 15 per cent of Aucklanders considered it a bad time to buy a house and a net 57 per cent expected house prices to rise.

Nationally, house price inflation expectations are at heights last seen in 2003 - the outset of a boom that's left prices and household debt at historically high levels relative to incomes.

Strangely only a net 34 per cent of Auckland respondents to the ASB survey thought interest rates would rise over the next 12 months. The financial markets beg to differ. They expect the Reserve Bank to raise its official cash rate a full percentage point next year.

How much higher it eventually rises, and how fast, will depend in part on how hard the LVR restrictions bite into house prices. As this is uncharted territory, no one knows.

The Real Estate Institute's house price index fell 0.5 per cent nationally last month but when economists adjusted for seasonal effects - winter being a dampener on the property market - they estimate it rose 0.5 per cent.

In Auckland it fell 4.4 per cent but that was from a record high and only to a level still 14 per cent higher than a year ago.

"The average seasonally adjusted house price rise over the past three months has slowed to a 5.3 per cent annualised pace, compared to a peak of almost 12 per cent in the three months to April," he said.

"Five per cent is broadly sustainable, if you think of growth in household incomes. But we would need to see the recent tentative signs continue through the spring and into the summer. I don't think the Reserve Bank will be persuaded by the recent data that they don't need to do something."

Mortgage loan approvals have been trending down, in number and by value, over the past couple of months.

That suggests that the banks, faced with a clear signal from the Reserve Bank about its discomfort at rates of high-LVR loans approaching a third of new lending, have got the message and tightened up on credit at that end of the market before being compelled to. With the near certainty of being reined in, they have an incentive to persuade their regulator to go for a milder rather than a harsher bite.

"But maybe what we are seeing is more buyer resistance, faced with those rising prices," Gibbs said. "Certainly that is what the Reserve Bank will be hoping."

First-home buyers will too, because the biggest thing pushing them out of the market is rising prices, not the banks.

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.